Author Topic: Inflation & Interest Rates: share your data sources, models, and assumptions  (Read 295326 times)

EscapeVelocity2020

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I think it was the ADP payrolls that really shocked the market.  The negative GDP can be fairly easily explained away as an artefact, but combined with an unexpectedly weak hiring number got an otherwise overbought market to take a breather.

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Big picture: The labor market started the year in a solid place and has not seen much deterioration. Some economists see the market as frozen in place, with not many people quitting jobs and companies curtailing hiring.

With the economy contracting slightly in the first quarter, economists will be watching the labor market closely.

The market often uses the ADP data as an early indicator of the official Labor Department job report, to be released Friday. Economists don’t expect too much weakness in the official data. According to a Wall Street Journal survey, economists are expecting a slowdown in job growth in April to around 133,000 from 228,000 in the prior month, with the unemployment rate holding steady at 4.2%.

ChpBstrd

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buying more things in an attempt to cheer themselves up.
Wouldn't "stocking up" or "buying before tariffs kick in" be a better explanation?
I can buy it. ;)

But I'm also afraid of overusing this explanation. I stocked up in December/January, but perhaps the majority of people didn't get the message we had elected "tariff man" until "Liberation Day", by which time they were paying tariffs on Chinese goods. I think the graph below tells a story that consumer sentiment has nearly nothing to do with consumption, but unemployment probably plays a role in both.

ChpBstrd

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Place a calendar reminder for Thursday, May 29. On that day, April GDP will exceed most people's expectations for the reverse reason the negative March GDP threw some people off. It might be a good day to bet on rising interest rates.

There is plenty of evidence that April imports will fall off a cliff. In particular, shipping has been in rapid decline during April. That could inflate GDP because imports are a subtracted factor.

The Personal Income and Outlays report, which includes PCE and Core PCE, will not be released until the next day, Friday, May 30. These were released on the same day in April, but will arrive one day apart in May. So a high GDP report on 5/29 could be interpreted as inflationary/anti-recessionary/pushing rates up on that day, and creating anxieties about the PCE report the next day.

I'm not sure what stocks will do in response to the mixed message (Yay, no recession! Boo, no rate cuts!), so maybe May 29 is simply a good day to short bond funds like TLT, ZROZ, and EDV. Just be sure to exit that day because we probably cannot know what the PCE report on the 30th will bring. 

MustacheAndaHalf

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The jobs report came in much better than expected.  The market expected hiring to be 138k for April, but the report came out with 177k jobs added.
Labor participation rate was also up.

https://www.bls.gov/news.release/empsit.nr0.htm

Apparently before companies fire employees, they cut back on everyone's hours.  In this jobs report, hours/week increased, signaling the opposite.  Overall a very strong jobs report.  But since this data comes very early in the tariffs, most of that isn't reflected.  The market expects the May jobs report to be worse.

ChpBstrd

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April Consumer Price Index:

CPI:           +0.2%, +2.3% annualized
Core CPI:   +0.2%, +2.8% annualized

These numbers are baffling to me. Wasn't April the month when we had massive tariff increases? Vehicles and apparel, two commonly imported items, had changes of 0.0% and -0.2%, respectively.
 
Are we experiencing such massive deflationary undertow that tariffs only kept us positive? Or did retailers simply not yet update their pricing, in light of policy uncertainty and stiff competition? Did prices hold relatively steady because businesses where whittling down their inventories (implying wholesale demand for imports was pushed back into this summer)?

The markets seem baffled too. Bonds are down. Stocks are up. And the odds of rate cuts by December decreased. Does this combination make any sense on a day when CPI was slightly tamer than expected? I'm struggling to find the narrative here.

reeshau

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April Consumer Price Index:

CPI:           +0.2%, +2.3% annualized
Core CPI:   +0.2%, +2.8% annualized

These numbers are baffling to me. Wasn't April the month when we had massive tariff increases? Vehicles and apparel, two commonly imported items, had changes of 0.0% and -0.2%, respectively.
 
Are we experiencing such massive deflationary undertow that tariffs only kept us positive? Or did retailers simply not yet update their pricing, in light of policy uncertainty and stiff competition? Did prices hold relatively steady because businesses where whittling down their inventories (implying wholesale demand for imports was pushed back into this summer)?

The markets seem baffled too. Bonds are down. Stocks are up. And the odds of rate cuts by December decreased. Does this combination make any sense on a day when CPI was slightly tamer than expected? I'm struggling to find the narrative here.

The tariffs were put in place, but only applied to goods that were not already en route.  That, plus the inventory buildup that had occurred earlier in the year, in anticipation of broader tariffs.  The port of Los Angeles is just now seeing the volume decline as producers withhold shipments, warehousing goods outside of the US hoping things would get better.

From what I see, there will be another surge of goods from China at the 30% tariff.  This will be, in part, goods for the Christmas season.  Will the gap in shipping in May be noticed?  I don't know.  But when Christmas at Walmat is 15% more expensive, people will notice.  They went bonkers for 9% inflation.

Omy

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At the risk of sounding like a crazy conspiracy theorist, do any government-generated metrics need to be based in reality any longer? If donny2dolls doesn't like the numbers, how likely is it that the metrics might be massaged a bit to manipulate the markets?

EscapeVelocity2020

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At the risk of sounding like a crazy conspiracy theorist, do any government-generated metrics need to be based in reality any longer? If donny2dolls doesn't like the numbers, how likely is it that the metrics might be massaged a bit to manipulate the markets?

I have to admit, I was shocked by the numbers.  We went out to eat for Mother's Day and the restaurant was easily 20% more expensive than a year ago for the same thing.  And I know our groceries have gone up more than 2.8% year over year.  This year in particular feels like inflation is coming back, things had felt more settled in 2024...  Other than filling my car, everything else seems to have increased (according to my credit card at least).

Maybe the April CPI just missed the tariff impact and May will be extra bad?
« Last Edit: May 14, 2025, 09:47:26 AM by EscapeVelocity2020 »

ChpBstrd

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At the risk of sounding like a crazy conspiracy theorist, do any government-generated metrics need to be based in reality any longer? If donny2dolls doesn't like the numbers, how likely is it that the metrics might be massaged a bit to manipulate the markets?
It’s not really a conspiracy theory anymore. This administration is rewriting history books to create a more politically correct interpretation, so why not also adjust monthly economic metrics? There are too few people in the opposition party to hold them to account, and investigative journalism is all but dead now that most people get their “news” from X or Facebook. .

The nightmare scenario, IMO, would be if JPow was to suddenly resign for any given reason. Markets would/should interpret that black swan event as a clear indication of political pressure to do unethical things like cutting rates for political reasons or falsifying data. The US dollar would likely tank, and if it didn’t immediately do so, you’d want to take the opportunity to get out of the US and into foreign currency denominated assets.

EscapeVelocity2020

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At the risk of sounding like a crazy conspiracy theorist, do any government-generated metrics need to be based in reality any longer? If donny2dolls doesn't like the numbers, how likely is it that the metrics might be massaged a bit to manipulate the markets?
It’s not really a conspiracy theory anymore. This administration is rewriting history books to create a more politically correct interpretation, so why not also adjust monthly economic metrics? There are too few people in the opposition party to hold them to account, and investigative journalism is all but dead now that most people get their “news” from X or Facebook. .

The nightmare scenario, IMO, would be if JPow was to suddenly resign for any given reason. Markets would/should interpret that black swan event as a clear indication of political pressure to do unethical things like cutting rates for political reasons or falsifying data. The US dollar would likely tank, and if it didn’t immediately do so, you’d want to take the opportunity to get out of the US and into foreign currency denominated assets.

If that were to happen, I think the US bond market would become the ultimate arbiter of truth, which is to say that yield would go up making our national debt unsustainable (without printing money and hyperinflating).  It doesn't sound quite so far fetched when I read stories of habeas corpus being suspended and pushback being 'manageable' so far by the Trump administration.


Paper Chaser

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PPI was way down. Of course, this includes very little impact from tariffs.

ChpBstrd

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April 2025 Producer Price Index: -0.5%, +2.4% annualized.

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The April decline in the index for final demand is attributable to prices for final demand services,
which decreased 0.7 percent. The index for final demand goods was unchanged.

March 2025:       0%
February 2025:   +0.2%

Possible narratives:

1) Despite tariffs, the underlying economy is heading in a disinflationary direction. Real yields (FFR minus CPI) of about +2% are pushing down inflation for services (which are not as vulnerable to tariffs) and this deflationary signal is only being obscured by goods inflation and the debate about tariffs. As the 2nd chart shows, indexed PPI has been essentially flat since 2023 - when real yields flipped positive.



2) PPI is being pushed lower by falling commodity prices that are filtering down into Services. For example, consider these YoY numbers:
Gasoline: -16.48%
Crude Oil: -21.83%
Steel: -12%
Iron Ore: -13.37%
Soybeans: -13.47%
Wheat: -20.55%
GSCI Index: -8.84%
London Metals Exchange Index: -5.9%
Containerized Freight Index: -41.66%
Of course, this is also an argument for the first narrative - that we're in the early innings of a deflationary cycle.

3) AI tools are already rapidly reducing the cost of providing some services, such as phone/chat customer service, accounting, management, troubleshooting, research, writing and content creation, software development, and project management. These developments are putting downward pressure on producer costs for services and by extension consumer inflation.

4) It's statistical noise. Reversion to the mean will occur.
« Last Edit: May 15, 2025, 01:02:10 PM by ChpBstrd »

ChpBstrd

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Wal-Mart CFO: Tariff-related price increases will start to hit in late May and early June.

WalMart uses the LIFO (last in, first out) method of accounting for the cost of goods it sells in the US market, and uses FIFO (first in, first out) internationally.

Thus, if prices for items in the US rise suddenly due to tariffs, then the gross profit of selling those items is the sale price minus the higher, most recent price. The price they originally paid for the item that was actually sold is not relevant. This is something like setting the cost at the replacement value. I.e. when WalMart reorders, it will have to pay something close to what it paid for the last item. 

So it is interesting that WalMart has (according to the CFO and my experience) largely sat out April and most of May without raising their prices to adjust for tariffs. WalMart is famous for holding lean inventories and using sophisticated systems to ensure they are not holding excess inventory. I can see their shelves are not bare, so I can conclude they've been buying imports throughout the craziest times of three-digit tariffs.

Yet, their quarterly earnings report released today shows business as usual. I'm not sure how to make sense of this, given WMT's necessary rate of inventory turnover. Perhaps they've been raising prices all along.


reeshau

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Yet, their quarterly earnings report released today shows business as usual. I'm not sure how to make sense of this, given WMT's necessary rate of inventory turnover. Perhaps they've been raising prices all along.

Just because Walmart usually has a lean inventory doesn't mean they have to.  They have often stocked up locally, for example pre-positioning inventory in expected hurricane zones.  Also, given the pressure they exert on suppliers, it may be those suppliers who really stocked up, to continue supplying to Walmart under existing contracts.

The impact of Walmart's announcement goes far beyond them, of course.  I'm sure Target and every other retailer are breathing a sigh of relief.  Walmart's CFO was careful to "praise the administration for their progress on tariffs," and try not to become a Trump scapegoat for rising prices.

This was, in essence, permission for everyone to raise prices.

ChpBstrd

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Just because Walmart usually has a lean inventory doesn't mean they have to.  They have often stocked up locally, for example pre-positioning inventory in expected hurricane zones.  Also, given the pressure they exert on suppliers, it may be those suppliers who really stocked up, to continue supplying to Walmart under existing contracts.
You are probably correct on this point. I am no WalMart expert. Given their revenue and inventory on the balance sheet, I calculated a 12x inventory turnover ratio per quarter. Imagine everything in a WalMart store being sold every 7.5 days, on average. That seems so incredibly lean that vendors must be holding some of the inventory on their books.

But if WalMart hasn't had to raise prices until late May / early June, then it must have signed pricing agreements to buy those inventories at pre-tariff prices. That means any suppliers who signed US orders for inventory not yet in the US could have absorbed serious damage from the tariff war.
Quote
The impact of Walmart's announcement goes far beyond them, of course.  I'm sure Target and every other retailer are breathing a sigh of relief.  Walmart's CFO was careful to "praise the administration for their progress on tariffs," and try not to become a Trump scapegoat for rising prices.

This was, in essence, permission for everyone to raise prices.
This is certainly correct. The competitive barrier to passing on tariff costs to the customer may have just crumbled. While we're all breathing a sigh of relief that 145% tariffs are no longer in place, we should watch for a rather sudden increase in the price of imported goods (i.e. most goods) to account for 10-30% tariffs. 

I was incorrect to anticipate a slightly hot April CPI, PCE, and PPI because of bigger lags and inventories in the supply chain than are evident from just looking at retailers' financial statements. Perhaps WalMart's price-hike warning reveals exactly how long these supply chains are for imported non-perishables: two months.

In contrast, when 25% tariffs on Mexico came into force, I noticed the price of avocados where I live jumped from 99 cents each to $1.25 within about two days. Bananas jumped from 59c per pound to 75c. These items, which jumped about 25% in price after 25% tariffs went into effect, immediately fell back down to pre-tariff prices once a 90 day pause took effect. Obviously perishable products such as these have a leaner and faster supply chain than clothing, electronics, canned goods, etc.

But if anyone has any illusions about the cost of tariffs being absorbed by retailers, wholesalers, or producers, think again. With perishables, 100% of the cost was immediately passed through to consumers AND marked up to previously existing retail margins. I doubt non-perishable imports will be treated any differently.

Consumers will simply have to buy less stuff, as Mr. Trump pointed out in his commentary about dolls. Consumers will still blow almost their whole paychecks, and retail margins and profits could remain the same, but they'll simply receive less stuff in return. Just as $10 bought 10 avocados pre-tariffs, and post-tariffs only bought 8, such will be the case with everything WalMart sells, cars, materials, medicines, etc. And just as Kroger earned the same gross margin selling 10 avocados at 99 cents as they earned selling 8 at $1.25, so will the sellers of more durable products.

I don't think aggregate demand in dollar terms will fall at all, but the amount of goods sold will decrease. Consumers may apply product substitution where they can, or just buy fewer frivolous things. This could actually help retailers if, for example, the amount of avocados they must pay to ship drops 25% while their sales of avocados in dollar terms remains the same. A reduction in inventory turnover might be offset by a reduction in the cost of inventory required to be kept in the supply chain, and a reduction in shipping/restocking costs.

We'll all get poorer in terms of the purchasing power of our labor or portfolios, but it might not show up on corporate financial statements or GDP.

The most interesting economic metric released today is below. The price of imported goods from China has been falling since COVID-induced supply chain disruptions, and has gone into freefall since the election of Tariff Man. Per the BLS, "The index last increased on a monthly basis in October 2022." and "The price index for imports from China fell 1.3 percent over the past 12 months..."

My interpretation: Chinese deflation is playing a role, but it also might be that merchants are trying not to be stuck with excess inventory after tariffs reduce demand for their goods. So they're accepting lower and lower margins just to move inventory, and to buy time before shutting down productive capacity in case things change. Imagine owning a Chinese warehouse full of inventory that is losing value every day due to deflation, and which might become virtually unsaleable as an export due to pending tariffs. You can unload it cheap and generate enough cash flow to stay afloat, or you can risk losing a lot of value. Now imagine being an American buyer in a potentially inflationary environment who might be able to stock a warehouse with items that will only become more valuable the longer they are held. Hence the spike in trade between November and March, which allowed WalMart to float out two months before raising prices.


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ChpBstrd

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Here's an interesting article about how easy it is to circumvent tariffs.
https://www.cnbc.com/2025/05/20/china-us-exporters-undervalue-cargo-dodge-us-tariffs-.html

TL;DR: Firms can use under-invoicing to skirt customs, and use disposable shell companies to agree to tariff liabilities that are never paid. Meanwhile, customs law enforcement will take years to ramp up to catch a larger fraction of these cases.

So in the grand scheme, 30% tariffs on China might only amount to 15% tariffs on China, unless laws and enforcement resources can be updated. This outcome would be roughly proportional with tariff evasion in 2023. However, the tariffs/incentives are now much higher, so perhaps evasion effort will increase?

Quote
A Goldman Sachs’ report released in January estimated that the tariffs Trump imposed on China during his first term saw evasions worth $110 billion to $130 billion in 2023, with understating value and mislabeling each contributing $40 billion and rerouting accounting for $30 billion to $50 billion.

In comparison, the total duty, taxes and fees collected by CBP in fiscal 2023 was $92.3 billion, according to government data.

So we'll have to wait and see what fraction of tariffs actually makes it through to inflation. That fraction is likely to scale up over the course of the next few years as (or if?) tariff law enforcement resources are increased.

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On a separate note, here is a simple correlation note showing that a country's rate of tariffs seems unrelated to its trade deficit. This is because retaliatory tariffs reduce exports. In the case of the U.S. tariffs are also expected to raise the foreign cost of dollars, further suppressing exports compared to a baseline scenario. 

« Last Edit: May 20, 2025, 08:45:59 AM by ChpBstrd »

johnsonmez

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Any thoughts on rate cut predictions? Will we get another 2020-2022? It's hard to find predictions on the internet


ChpBstrd

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Any thoughts on rate cut predictions? Will we get another 2020-2022? It's hard to find predictions on the internet
Use this link to find the rate that the Federal Funds Rate futures market implies in its pricing.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html

Use this link to see the results of surveys of economists, and toggle different surveys on and off:
https://econforecasting.com/forecast/ffr

ChpBstrd

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Atlanta Federal Reserve President Raphael Bostic does not have a vote on the FOMC this year or next, and is thus in a position to speak in a more candid way about the committee's thinking than voting members. I.e. he's a good communications vehicle for the FOMC. Here's what Bostic said today:
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"One thing that we've heard is that a lot of the tariff impact to date has actually not shown up in the numbers yet. There's been a lot of front-running, building inventories and all those sorts of things. And we are hearing from an increasing number of businesses that those strategies ... are starting to run their course," Bostic said on the sidelines of an Atlanta Fed conference in Florida.

"If these pre-tariff strategies have run their course, we're about to see some changes in prices, and then we're going to learn how consumers are going to respond to that."

TL;DR - The FOMC is anticipating a significant uptick in prices.

Given the tame April CPI, I think next week's April PCE will be relatively tame too. May prices should start to show an effect, and June is about when we'll start to see the full effect of the tariff war so far.

May 29 (April PCE) will be a snooze, but June 11 (May CPI) might provoke some market anxiety.

In the July-August timeframe, we'll start hearing about disappointing Q2 retail earnings, especially from LIFO companies like Amazon, Costco, Lowes, Walgreens, etc. which may have had to keep prices low through April and May due to competitive pressure and therefore lost money. We'll also experience round 2 of Trumpian escalation, if he doesn't violate his own agreement before then. I'm tempted to trade a bull spread on the $VIX, with contracts expiring 7/16. Hard to imagine a low-volatility situation then.

reeshau

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The thing is, Trump is going to yell at the Fed even harder to lower rates, when tariff-driven inflation slows the economy...

neo von retorch

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Are bond/treasury yields up? This is a bit over my head, and Yahoo! Finance is my trusted source for ultimate truth ;)

e.g. their headline said yields are surging. I'm not sure that's what I see here: https://fred.stlouisfed.org/series/DGS10

EscapeVelocity2020

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Are bond/treasury yields up? This is a bit over my head, and Yahoo! Finance is my trusted source for ultimate truth ;)

e.g. their headline said yields are surging. I'm not sure that's what I see here: https://fred.stlouisfed.org/series/DGS10

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

This is a more up to date reading on the yields.  Yesterday was apparently a bad 20 year auction leading to the 10 year and 30 year breaching key resistance levels of 4.5% and 5%, respectively.  Japan also had a bad 20 year auction result, which isn't reassuring (Japan is now the largest holder of US Treasuries, at 1.13T).
« Last Edit: May 22, 2025, 08:26:06 AM by EscapeVelocity2020 »

ChpBstrd

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Some mixed messages have come out on U.S. housing prices over the past few days.

According to HUD, the median sales price of new houses fell in Q1:


According to S&P CoreLogic Case-Shiller, the home price index has been rising throughout the 1st quarter:


Also according to the US Federal Housing Finance Agency, house prices rose in Q1:


The outlier is new homes. This could indicate that homebuilders are slightly downsizing the houses they are building, reversing a long-term trend toward bigger and bigger homes. As one realtor notes:
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According to the U.S. Census Bureau, the median size of a completed single-family home in 2023 was 2,233 square feet. Today, in 2025, the average size of a single-family home is around 2,200 square feet, which shows a shrinking trend toward smaller homes.

So that little dip in the size of new homes could explain the first graph, while a trend of continued appreciation for all homes explains the last two.

waltworks

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Just look at CalculatedRisk if you're interested in housing numbers. All the analysis you could want, written by a smart guy with no axe to grind.

FWIW, housing prices are down (seasonally adjusted) pretty much everywhere this spring according to Case-Schiller. They are down a LOT in some places (SF, Austin, all of Florida, etc).

https://www.calculatedriskblog.com/2025/05/newsletter-case-shiller-national-house.html

Inventory and sales numbers are pointing to a housing correction going forward, but how much of one remains to be seen.

-W

EscapeVelocity2020

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Is anyone tracking the cost of Credit Default Swaps?  It keeps coming up as a source of concern, with the flash of a graph showing it's on the rise, but the graphs come from paid subscriptions so I have to watch YouTube videos to get updates.  The only free thing I've come across is this - https://en.macromicro.me/charts/68239/us-5year-cds  This is the YouTube video series - The Worst Stock Market Warning Sign Is Rising Again…

We just got news that tariffs seem to have been blocked and mostly positive NVDA earnings, so there should be a nice tailwind in the near term, but rising borrowing costs still bother me.

ChpBstrd

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Given the tame April CPI, I think next week's April PCE will be relatively tame too. May prices should start to show an effect, and June is about when we'll start to see the full effect of the tariff war so far.

May 29 (April PCE) will be a snooze, but June 11 (May CPI) might provoke some market anxiety.
Called that one.

April PCE:           +0.1%, +2.1% annualized
April Core PCE:   +0.1%, +2.5% annualized
Personal Savings Rate:  +4.9% (up from 4.3% in March, and a recent low of 3.5% in December)
Personal Income:  +0.8%, +5.49% annualized (Wow! Especially with core inflation at just 2.5%)

Strangely, the following often-imported goods fell, and PCE inflation was concentrated in services:
> food and beverages: $-0.4B
> recreational goods and vehicles: $-3.1B
> clothing and footwear: $-3.4B
> motor vehicles and parts: $-4.5B
> other non-durable goods: $-5.9%

Did consumers spend less on these areas because they'd already stocked up on their pre-tariff shopping list?

These massive increases drove PCE, and dwarf the declining categories:
> housing and utilities: $+24.7B
> health care: $+20.3B
> food services and accommodations: $+13B

The increasing categories seem to be dependent upon local labor - the same labor whose wages are rising at a 5.49% rate. So maybe consumers are flush with import purchases they pulled ahead, and are now competing for services plus increasing their savings rate?

I'll stick with my prediction that May CPI, to be reported June 11th, is where the first price hikes will start to show up - probably in a small way. Services inflation will stay strong, as it is based on wage increases that have already happened. After all, one person's wages are another's bill for services.

Goods inflation will appear in CPI as pre-tariff inventories are depleted and those WalMart price hikes start to appear. May PCE will depend upon whether consumers pay those higher prices, or instead continue buying services and saving their money.

Odds of rate cuts increased, but I don't see anything recessionary about today's numbers. They look more like economic overheating.

EscapeVelocity2020

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At the risk of sounding like a crazy conspiracy theorist, do any government-generated metrics need to be based in reality any longer? If donny2dolls doesn't like the numbers, how likely is it that the metrics might be massaged a bit to manipulate the markets?

Maybe not the answer to the conspiracy theory, but definitely related - Economists Raise Questions About Quality of U.S. Inflation Data -
Labor Department says staffing shortages reduced its ability to conduct its massive monthly survey

Sadly the article is behind a paywall, but it is certainly possible that corners are being cut and data quality is compromised.

ChpBstrd

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Here's an interesting and calming piece of data:

EscapeVelocity2020

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But why put the graph in terms of nominal yield and not real yield?  Pretty useless if you ask me.

ChpBstrd

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The CPI report is in, and it... looks suspicious.

CPI:               +0.1%, +2.4% annual
Core CPI:       +0.1%, +2.8% annual

The reasons I say it looks suspicious include:
  • So you're telling me tariffs had zero effect in May? The price of Apparel fell for a 2nd month, this time to -0.4%? New vehicle prices fell too? Was Trump right about producers and retailers eating the tariffs, and the economists were wrong?
  • The -2.6% change in gasoline prices don't seem to align with other sources. Per Trading Economics, wholesale gasoline cost $2.04 on May 1, and $2.01 on May 30, but this obscures a large camel hump in the middle of the month - up to $2.17 - that should have increased the average monthly price. When I downloaded the daily dataset from the U.S. EIA, I found inconsistent/inconclusive results depending on which delivery location was selected. So I guess it's possible, but strikes me as odd.
  • Hourly earnings have been increasing at 3.8% to 3.9% each month this year with the unemployment rate at 4.0% to 4.2%. Meanwhile retail sales have reportedly been growing at a 4-5% annual pace in each month of the first quarter. How... exactly... is the economy supposed to be running this hot while going through disinflation? It seems to defy everything we know about inflation. Who is absorbing a steadily increasing cost of labor, in a labor shortage environment, without raising their prices? S&P500 profit margins seem to be holding up fine, so where are these costs going?
So I'm casting about for an explanation consistent with economics, experience, and what we know about inflation without getting into conspiracy theories.

1) Could it be that retailers are selling off their massive inventories built up before the tariffs, at pre-tariff prices? No, this explanation is inconsistent with measurements of still-growing inventories and all the various advance inventory measures.

2) Could it be that the economy is hot, while money supply is in decline? No, this is contradicted by the trend toward increased M2 since December. A slight decline in the velocity of M2 does not seem material.


3) Could it be that the economy is slipping into the early stages of recession, causing disinflation, and unemployment is about to rise? No, this is contradicted by strong retail sales, falling NFCI, still-low initial claims, and still-solid durables orders and construction spending.

4) Could it be that the rising Personal Savings Rate since December has allowed wages to rise while keeping demand in check? Finally, an explanation that makes sense! Between December and April, consumers increased their savings rate from 3.5% to 4.9%. Perhaps this behavior was initiated by fears about the Trump administration, recession and national decline talk, government layoffs, rising continuing claims, or the hangover from pulling ahead purchases in November and December. Consumer Sentiment has plunged so far in 2025, and usually this is associated with increased consumption, but this time it seems to have led people to do the logical thing and brace their finances for layoffs or to make up for the lost wealth effect during the stock market correction. During the anxieties of Trump 1.0, the PSR increased from 5.6% in February 2016 to a pre-COVID peak of 8.4% in December 2018, amid another stock market correction. So it's possible the PSR could rise another 3% from here, absorbing money supply that would have been inflationary if it had been spent, pumping up the values of assets and the margins of retail banks and brokerages rather than contributing to aggregate demand for goods or services.

However, I'm skeptical it can last. Today's vague announcement of a "framework deal" with China could mark the beginning of the end of the tariff wars for several months, and stocks have mostly recovered from the correction. So what's to stop consumers from continuing to run up their credit card balances, after possibly putting a solid dent in them during Q1? On the other hand, almost all residual COVID stimulus is long gone, and the low PSRs of the past few years could be an anomoly, destined to revert to the pre-COVID trend of about 6%.

Overall, I like the savings rate explanation best, for how these seemingly contradictory data can coexist. It reinforces my impression, stated here years ago, that the PSR is underappreciated as a factor in inflation and economic growth. Now it's the only explanation that even makes sense, given the other data.

reeshau

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]So you're telling me tariffs had zero effect in May? The price of Apparel fell for a 2nd month, this time to -0.4%? New vehicle prices fell too? Was Trump right about producers and retailers eating the tariffs, and the economists were wrong?

I think May is still too early.  The trade deficit spiked in Q1, as businesses of all types stocked up, as they could.  Also, tariffs go into effect based on outbound date, so ocean voyages would have still come in tariff-free after April 2.  That's why ship cancelations were a May thing--they would have been subject.

What I have read says look for July to see the bite of inflation from tariffs.  That lines up with Walmart's CFO's comments.

I'm sure these lags and a lack of understanding them will confuse a lot of reactions.

BicycleB

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@reeshau and @ChpBstrd may have figured it out, but for completeness, here's another idea: AI is keeping production costs in check by replacing  entry-level white collar hires, and increasing some white collar productivity.

This is consistent (in my primitive imagination) with:
a. overall employment is good, because there is overall hiring; the hot economy is masking the lowered hiring of just the entry level white collar workers
b. article I read last week claiming that compared to overall hiring, unemployment for recent college grads is 3% higher this year than normal (to be fair, was from unfamiliar writer on Medium)
c. wage rises include high pay for the productive experienced white collars, skewing up while the low paid entry levels are (relatively) absent
d. savings rate and tariff timing explanations listed in the last couple of posts, which would largely be unaffected by this factor

If this is even happening, it's probably a small factor at this point, though.
« Last Edit: June 12, 2025, 09:15:34 AM by BicycleB »

EscapeVelocity2020

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Here's what CNBC had to say - Here are the three reasons why tariffs have yet to drive inflation higher

Quote
At least three factors have conspired so far to keep inflation in check:
  • Companies hoarding imported goods ahead of the April 2 tariff announcement.
  • The time it takes for the charges to make their way into the real economy.
  • The lack of pricing power companies face as consumers tighten belts.

As long as TACO Don gives companies hope that they can outlast the turmoil, they will resist raising prices and even take some losses...  but eventually the taco cracks and spills everywhere!

ChpBstrd

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Here's something that has reached the level of significance:

Initial claims plateaued at the highest level of 2025, while continuing claims spiked upward. This suggests layoffs are not occurring en masse or anything, but the people who do lose their job are having a hard time finding a new one.

Is this because there are fewer job postings? No, that is contradicted by the jobs report released June 1st, and strong new business formation stats released June 11th. It may, however, be consistent with the May ADP report which revealed only 37,000 jobs were created that month.

So if employers suddenly froze their postings of new jobs in May, but left the old ones up, it would have the most immediate impact on the people who had just been laid off, experienced a week of unemployment, and now are going through a second week. Formerly, people in this situation would snatch up a fresh new opening.

However, the number of job postings to Indeed.com seems to remain on trend, raising the question about whether employers are pausing hiring for already-posted jobs. THAT could be a sign of imminent layoffs, because as long as jobs are posted the current employees are less likely to get spooked and bail out.

Paper Chaser

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FED holding rates steady for now. Sounds like they're in "wait and see" mode until data comes through on the impact of tariffs.
They did leave in the possibility of cuts this year, but fewer voters indicated that was likely. Expectations for GDP growth are lower than last meeting, and expectations for unemployment are higher. Seems like a pessimistic turn

ChpBstrd

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Quick data point:
Quote
America’s effective tariff rate is now 14.1%, according to Fitch Ratings, up from 2.3% last year. That means Trump raised taxes on imported goods by nearly 12 percentage points in 2025. Economists expected substantial inflation increases as a result.
Perhaps we could multiply this 12% number by the goods imports as a percentage of GDP (12.3%), make a slight adjustment for product substitution and demand destruction, and arrive at an estimated impact on CPI/PCE for goods (i.e. about +1.48%, minus adjustments). If underlying inflation is about 2.4%, the addition of tariffs would increase inflation to 3.9%, before adjustments.

Imports/GDP seems like a reasonable way to napkin-math the scale of price increases from imports, as GDP is essentially the sum of transactions. If 12.3% of those transactions are imports, then a price increase to imports will have a proportional effect on the sum of all transactions, right?

Let's adjust down to 3.75% to uber-conservatively account for adjustments. By that metric, today's 4.25%-4.5% range for the Federal Funds Rate is somewhat restrictive. 50 basis points of cuts could equalize inflation and interest rates, leaving us at roughly neutral in a post-tariffs world.

The just-released Summary of Economic Projections forecasts an annualized PCE of 3.0% and a Core PCE of 3.1% at the end of 2025. This seems like a reasonable middle ground, since the tariffs won't affect PCE until the last 7 or 8 months of 2025. The weighted average of the April PCE rate of 2.1% and my 3.75% unadjusted post-tariff estimate is 3.2%. Adjust that down another 2 tenths for substitution, demand destruction, and restrictive policy for most of the year, and we've backed into the same estimate as the SEP! Now we're in alignment with the FOMC's thinking!

It would also mean the current FFR range of 4.25%-4.5% would be a bit restrictive by the end of this year. Seen this way, the FOMC could get away with 50bp in cuts and still be in restrictive territory. Thus, the Fed's current wait and see attitude might be more short-lived than we think.

If June and July inflation numbers align with the expectations communicated in the SEP, then the FFR futures market will be correct in assigning a strong probability of a rate cut on September 17.

This exercise has relieved some of my media-induced inflation worries by pointing out that even if consumers "eat" 100% of the bill for tariffs, and even if they don't reduce their spending on imports at all, it still won't be that big of an effect. And tariffs will be a one-time effect, rather than a steady inflationary force. So if we're onto a different subject by 2026, inflation will continue approaching the FOMC's 2% goal.

I remain bullishly allocated, but also hedged.

MustacheAndaHalf

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Estimating the impact of tariffs requires estimating their path over time.  If tariffs drop later this year, that reduces the impact of tariffs on inflation.  An example is the UK making a deal.  Trump has also claimed a deal with China a week ago, which has been met with silence by China (who probably knows they have the upper hand).

"Fed sees its preferred inflation gauge topping 3% this year, higher than previous forecast"
https://www.cnbc.com/2025/06/18/federal-reserve-dot-plot-and-economic-projection-june-2025.html

Economic data still shows a mixed signal, but with declining GDP.  A recession, by the traditional definition, is negative GDP for two quarters.  I think markets won't worry much until those estimates are below 1%, which isn't projected now... but the Fed keeps lowering their growth estimate.  Still uncertain.

ChpBstrd

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PCE and Core PCE for May will be reported Friday.

CNN's published estimates are:
PCE:                +0.1%, +2.3% YoY
Core PCE:        +0.1%, +2.6% YoY

These seem in line with May CPI which came in a +0.1% and +0.1% for Core. Annualized CPI came in at 2.4% and Core CPI at 2.8%. So the PCE report should be a non-event, due to the close correlation between these rival inflation measurement techniques. What I'll be watching for on Friday is an increase in the Personal Savings Rate, possibly above 5%.

The real fireworks don't come until July 15th when June CPI is belatedly released. I expect June to reflect the full brunt of Trump's "liberation day" tariffs.

If the July 15th June CPI report is benign, and if the personal savings rate isn't skyrocketing, I think the coast is probably clear. In that contingency, supply chain margins will have eaten the tariffs, consumption will have remained strong, foreign demand for treasuries will have been assured, and aggregate demand will not have taken a recessionary hit. Rate cuts will be right around the corner.

Jerome Powell and I seem to think this outcome is unlikely. In JPow's June 18 press conference, he repeated over and over again that somebody has to eat the tariffs, and that tariffs will raise prices for consumers. He noted that months of inventory built up before the tariffs are being replaced by post-tariff inventory, and that retailers have communicated price increases are incoming. So July 15 might be a good day to hedge against investor complacency.

reeshau

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How could any report before July, when the 90 day pause for the " reciprocal tariffs" be clear?  Or perhaps August, when the 90 day pause with China expires?

Yes, there are some tariffs.  But the "big ones" are yet to come.  And, even then, distributors and retailers will have built-up stock to burn off. (Building up inve tory at today's tariff rate, to hedge against the initial / maximum levels)

I do think we will see impacts vary by sector.  Autos are in a very interesting place, already very high-priced relative to median income.  Wal-Mart has explicitly said increases will come starting in June.  Electronics won't lag far behind the China expiration date, which coincides closely with back to school season, to eat away inventories.

I don't see how anyone gets a clear picture of things before the Christmas season reports.  People will take action before then, probably, but it will be a muddled mess until that cycle plays itself out.  Just in time for 2026 primary season!

ChpBstrd

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How could any report before July, when the 90 day pause for the " reciprocal tariffs" be clear?  Or perhaps August, when the 90 day pause with China expires?
They couldn't. June CPI, reported July 15th, will give us the first signal about whether the cost pass-throughs from tariffs will be significant or not. If WalMart was raising prices between late May and early June, that's a good sign everyone else's inventory supply could last about that long too. We are now probably at a point where pre-tariff supplies of most things are reaching a point of exhaustion.

Yes, there are some tariffs.  But the "big ones" are yet to come. 
This is speculative. It could also be that "big deals" are yet to come that could result in lower tariffs than exist today.

Perhaps the administration is watching inflation just like we are. If today's tariff regime is pushing up inflation unacceptably, they'll make deals. If it's a nothingburger in the grand scheme, maybe they push for more tariffs.

reeshau

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Yes, there are some tariffs.  But the "big ones" are yet to come. 
This is speculative. It could also be that "big deals" are yet to come that could result in lower tariffs than exist today.

Perhaps the administration is watching inflation just like we are. If today's tariff regime is pushing up inflation unacceptably, they'll make deals. If it's a nothingburger in the grand scheme, maybe they push for more tariffs.

Very true, and it didn't come out as I intended in my prior post.  As exists today, there will be significant tariff boosts.  But nothing so far has stayed the same as it began.  All the more reason that any action, assuming the economy getting hotter or colder, has a high chance of being wrong, and needing to be reversed.  As long as things are terrible, wait for the facts to come out, and the uncertainty to be resolved before acting.

EscapeVelocity2020

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I know this is just an anecdote, but I picked up some fireworks and couldn't help but notice how different the pricing was this season.  They are trying to obfuscate the 20 - 50% increases with BOGO, rewards, and bulk discounts, but the pass though of tariffs is noticeable.  I know the owners so we had a nice chat.  They felt lucky to defray the 100+% tariffs by delaying and stocking up early, but still were hit with some 40+% costs as well as shipments not arriving...  I think most retailers figured out how to avoid really bad tariffs, but increases are working their way through the retail system.  Since nothing has changed, they will arrive in a building wave in the coming months.  We have no real 'deals' with our biggest deficit countries, so we could start to feel the 10-20% increases right around the time Trump reverts back to his Liberation Day reciprocal rates!  The market is still betting on the TACO trade to pay off, but you never know when Trump will do something stupid just out of spite! 

At least this is what Powell seems to be thinking and this is his whole life.  I tend to believe the person with the data over the retail trader that never saw a dip they didn't want to buy.